Essays on the public debt in Europe

Abstract

The literature on European public debt is extensive and controversial. This study has therefore used a systematic approach to overcome the main difficulties in this area. In this way, it aims to answer three main questions. First, whether there is any classification of groups among European countries based on debt behavior, with some core group; if there is such a core group, what can be said about the solvency/sustainability of the debt for the countries in this group; and, whether the greater economic integration among the countries belonging to this core group translates into spillovers of shocks from one to another and, if so, in what magnitude. Cluster techniques were used to answer the first question, making it possible to distinguish three groups with a good level of precision. Next, to detect possible convergence clubs, the convergence testing methodology proposed by Phillips and Sul (2007, 2009) and the algorithms proposed by von Lyncker and Thoennessen (2017) were applied. The results confirm the existence of two debt convergence clubs in the European Union. Taking the intersection of the cluster and convergence results, a sub-sample of twelve countries was defined for which a solvency analysis was applied. To answer the second question, wavelets were used to assess the solvency/sustainability of the public debt of the twelve countries in the sub-sample. The results point to evidence of insolvent behavior in eight of the twelve countries analyzed. To answer the third question, the connectivity spillover approach proposed by Diebold and Yilmaz (2009, 2012, 2014) was applied to a VAR model structure with time-varying parameters (TVP-VAR) according to Antonakakis, Chatziantoniou, and Gabauer (2020). The results show that around 60% of the total connectivity of the network formed by the twelve countries in the sub-sample comes from spillovers, in this case from debt shocks between these countries. Spillovers increase during periods of crisis, especially during the COVID-19 pandemic. The results of this study are useful for evaluating fiscal policy and mapping the transmission of shocks, which makes it possible to adopt preventive actions aimed at reducing the negative impacts of a possible crisis, especially for a region with an unfavorable fiscal history and threatened by recent turbulence such as the European Union.